Wednesday, May 27, 2009

Deadline Looming

I understand that a deadline is looming in the talks about how to bail out General Motors. Via The Atlanic.

As General Motors teeters towards bankruptcy, with a looming deadline of midnight tonight for bondholders to agree to a stock swap, Reuters reports that the talks don't look promising. The Wall Street Journal got the scoop regarding how the unions will shake out in all of this: very similarly to how they did with Chrysler. This seemingly good news for unions might actually turn out to harm them.

According to the WSJ, unions will end up owning 17.5% of the company's common stock, along with $6.5 billion in preferred stock (which includes a whopping 9% annual dividend).

Which means that the UAW will hold ownership in the company. That's not a good idea. However, the financial markets are watching these developments and the Law of Unintended Consequences is liable to hit home.

Bond investors literally can't afford to lend to unionized companies because it's clear that current power in Washington will take the unions' side, despite past bankruptcy law precedents that favor senior creditors. That means Washington's actions in pushing for these bankruptcy verdicts to come out in favor of the unions will probably hurt unionized companies in the long run.

Good point. If a company can't get credit, then it may not be long in business. The rules that Obama is setting shows creditors that in a bankruptcy, unions will be favored over their legitimate claims.

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